Ivanhoe Corp. agreed to lease property from Swifty Corp. effective January 1, 20
ID: 2552270 • Letter: I
Question
Ivanhoe Corp. agreed to lease property from Swifty Corp. effective January 1, 2017, for an annual payment of $24,963, beginning January 1, 2017. The property is made up of land with a fair value of $108,000 and a two-storey office building with a fair value of $182,000 and a useful life of 23 years with no residual value. The implicit interest rate is 7.5%, the lease term is 23 years, and title to the property is transferred to Ivanhoe at the end of the lease term.
Prepare the required entries made by Ivanhoe Corp. on January 1, 2017 and at its year end of December 31, 2017. Both Ivanhoe and Swifty use ASPE.
(To record inception of lease)
(To record first lease payment)
(To record accrued interest)
(To record depreciation)
(To record inception of lease)
(To record first lease payment)
(To record accrued interest)
(To record depreciation)
Explanation / Answer
Since there is a provision that the title to the property is transferred to Ivanhoe at the end of lease term, it is Capital/finance lease.
Lessor : Swifty Corp.
Lessee : Ivanhoe Corp.
Journal entries in the books of Ivanhoe Corp
1) To record inception of finance lease.
January 1, 2017
Property A/c Dr. $269767
To lease liability A/c $244804
To Cash A/c $24963
Note: Sine Future value of property is $290000, the present value is $269767, for 23 years @7.5%
2) To record Interest and depreciation
December 31, 2017
Interest:
Interest Expense A/c Dr. $1872
To Interest payable A/c $1872
Note: Interest = 24963×7.5% = $ 1872
Depreciation:
Depreciation A/c Dr. $7913
To Accumulated Depreciation A/c $7913
Note:Depreciation is not charged on land.
On building charged on straight line basis for 23 years
3) To record first lease payment
January 1, 2018
Lease liability A/c Dr. $23091
Interest payable A/c Dr. $1872
To Cash A/c $24963
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